Judge denies insurance coverage for Stanford victims

In a crushing blow for victims of convicted con man R. Allen Stanford, a federal judge has ruled that investors who lost money in Stanford's $7 billion Ponzi scheme aren't eligible for payments from a brokerage insurance fund.

In a legal battle during the past year, the Securities and Exchange Commission had ordered the Securities Investor Protection Corp., a fund designed to protect investors from brokerage fraud, to pay claims. SIPC, however, argued that because most losses stemmed from certificates of deposit drawn on Stanford's Antiguan bank, its coverage didn't apply.

In his ruling, U.S. District Judge Robert Wilkins of Washington said that Stanford investors actually deposited money in the bank, where the CDs were held. While Stanford's brokerage firm was an SIPC member, the bank wasn't, and therefore investors aren't covered.

By attempting to claim that the brokerage should be responsible for the losses, the SEC was trying to expand the statute that created SIPC, the judge found.

Instead, though, the decision actually narrows it, perhaps not legally, but practically. The message for all investors is clear: SIPC is essentially a sham. It may pay in some cases, if you are fleeced in just the right way, as Bernie Madoff's clients were, but not if you're ripped off in others.

SIPC welcomed Stanford's brokerage as a member, and Stanford used SIPC insurance to convince clients they were protected. Stanford's co-mingled finances made it difficult to separate the brokerage from the bank - or for that matter, from Allen Stanford's personal finances.

Throughout this process, SIPC argued that paying for Stanford's losses, on top of Madoff's and MF Global, would bankrupt the fund and increase the costs on the brokerage industry.

This is the same industry that has consistently done a poor job policing its own, allowing scams like Madoff, MF Global and Stanford to thrive.

SIPC, in other words, provides cover for crooked brokers. It's part of the marketing brochure used to sell the scam, but its real protection is so narrowly defined as to be almost worthless.

Sadly, for Stanford's victims, this is just more of the same. Every protection and safety net has failed them - regulators, the brokerage industry, banking commissions and even the bankruptcy process. Any recovery they receive will be pennies on the dollar.

Loren Steffy formerly served as the business columnist for the Houston Chronicle and has appeared on CNBC, Fox Business, the BBC and the PBS NewsHour.

He is the author of "Drowning in Oil: BP and the Reckless Pursuit of Profit" published by McGraw-Hill in 2010 and "The Man Who Thought Like a Ship," published by Texas A&M University Press in April 2012

Before joining the Houston Chronicle in April 2004, Steffy was Texas bureau chief and a senior writer for Bloomberg News in Dallas for 12 years. He also worked at the Dallas Times Herald, the Dallas Business Journal and the Arlington Daily News.